How does a private company go public? What is the process and requirements? Is there a set amount of profit that a company has to make before going public?
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Founders just say “hey, we want to sell some of our shares”. Why? Because they want the money. Imagine having a $10m painting in your living room. You would be a multimillionaire on paper, but you can’t do much with it.
I’m not too knowledgeable on the process and requirements, sorry. I just know they get way more scrutinized financially and they now have a legal obligation to please the shareholders.
They don’t even have to make a profit, look at Uber.
you go to a bank and ask them to help you go public. They get small % of the money you raise, so they will take care of technicalities.
Bank can refuse if they do not believe you will be able to raise enough money, i.e. if few people will want to invest into your company.
People want to invest into a company if they believe its stock will grow, which is supposed to represent belief in future profits. If your company does not make a profit now, at least it needs to have millions of user that could be monetized later, or drilling rights for a large oilfield, or something that will help you make profit in the future.
Fun fact – you can the paperwork and buy a shell company that already was approved by the SEC and just fold your private company into that.
More on point to your question: Generally as a company is growing, the founders are getting investment money. Each time they get an investment they all need to agree how much the company is worth. For example, if the founders of ABC Tech Inc received an investment of 1 million dollars for 10% of the company, then that means ABC Tech Inc is currently “valued” at 10 million dollars. Put another way, a 10% stake of a 10 million dollar company would cost 1 million dollars so it works when you calculate it backward. Generally when a stock goes “public” and now ANYONE can invest by purchasing a share, the company decides the amount of stock to release (this can be in the millions) and based on the amount, the initial public offering (IPO) is simply the latest value divided by the amount of shares released. It’s a little more nuanced than that, but that is basically how it works.
You file a certain report with the SEC and then you’re allowed to sell stock to the general public. The report is very extensive, and costs hundreds of thousands of dollars in lawyer and accountant fees and takes months to complete.
Then once you are public, public companies are required to make public quarterly and annual reports including audited financial statements along with reporting any significant corporate events, and it can be a crime or result in lawsuits if you don’t properly report them. Private companies don’t have to disclose nearly as much; they just can’t outright lie.
There’s no set amount of profit you need to go public. But if you have a startup company and your business model isn’t working, you might want to stay private as long as possible, because going public forces you to show all of your information and you can’t BS anymore. That’s what happened with WeWork – they couldn’t go public in the end because it would have become obvious that the company’s business model and valuation made no sense.
A public company is a company which is traded on a public open stock exchange. The stock exchanges do have a lot of requirements for companies traded on them. Due to the high frequency of trades it is hard for the traders to do the regular due diligence process that is required before buying a company or even on the sellers to see if there is a special reason they are selling. So in order to go public a company needs a lot of routines in place to make sure financial information is kept secret, that those people who know is listed publicly and monitored for suspicious trading and that the financial information is released on the right platforms and at the same time. So there is no possibility of any of the traders on the public market getting scammed by someone following the CEOs twitter feed for early hints.
All of these routines needs to be documented and implemented and reviews of this will be required. Then all the relevant financial information to any stock trader needs to be published to allow analytics to go through them for their initial assessment of the company. And finally the CEO and board member can launch the initial public offering by ringing the stock exchange bell that signals the start of the trading day.
All of this is a lot of work for the company and involves a lot of fees along the way. So it does not make sense for a small company to go through all of this. It is much easier for them to go through a due diligence process by any potential investor so they can walk through all of their financial and operational details with each investor individually. But there are also larger companies where the owners do not want them to go public because of all the work involved and all the financial information which becomes public. But it tends to be that larger corporations go public in order to make it easier for new investors to buy the stock while smaller companies can do without.
There are reporting requirements (P&L, EBITDA, Liabilities and Assests and such) with the SEC, usually people (controllers, CFO, CEO, etc…) with experience in the IPO process are needed in those positions to provide credibility.
At least that was my experience working for a company that was intent on going public (the great recession arrived and the company went bankrupt instead and my “options” as an employee became worthless).
The company has to file documents with the SEC that lay out their financials (revenues, profits/losses, assets, etc.) and risk factors the business might face. They typically do a “road show” discussing the business with decision makers at various investment banks to get them to commit to placing shares with their clients. There are no profit requirements, and such — many tech companies go public before profits, often viewing the capital influx from an IPO as the way to grow to profitability.
There are lots of rules around the process, but the biggest one is that your company must play by the Security and Exchange Commission’s (SEC) rules. There are rules around what you report, how you report it, and a few minor leadership structure requirements. A set amount of profit is not required; the company can make no profit at all. You make an application to the SEC, called the S-1, with the details of your company, your financials, and why you want to go public. They review it to make sure you’re compliant, and then you make a phone call to an investment bank, like JP Morgan.
You negotiate with them to “underwrite” the company. This means that you say “Hey, JP Morgan, I would like to sell 1 million shares of my company!” And JP Morgan says “Sure, we’ll give you 50 dollars per share, for a total of $50M”. And you say, “sounds fair.”
By the way (and a lot of people get this wrong): when JP Morgan gives you that money, that’s the ONLY time in the process that the company itself makes money. Everything after this is _individuals_ (or other companies) making money by flipping the stock.
So you sell the shares, and the company gets $50M. 10 minutes later, JP Morgan resells the shares on the public exchange, where people like you and me can buy it.
Why doesn’t the company just sell the shares directly on the public exchange? Short answer, it’s tricky to do that, but sometimes (Spotify) that’s what happens.
Congrats, now you’re public!
About requirements: I should add that technically you must explain in paperwork to the SEC _why_ your company needs the money. This used to be important, and the SEC could reject your application if the answer didn’t seem reasonable. Now, however, it’s generally good enough to say something vague, with the real reason being “we want to get rich”
The private company that wants to go public (i.e. sell some of its shares to the public) hires bankers.
The bankers help the company write its prospectus (like a brochure and listing for selling a home) that includes information on what the company does, how it makes money, how it expects to increase revenue and profit, who current owners are, who runs it, what some risks are, its financial statements etc.
The company and its bankers try to drum up interest by going on a roadshow to large institutional investors (like mutual funds) and talk up the company.
Eventually the company ‘lists’ on a stock exchange and a combination of large buyers (like mutual funds) and small buyers (individuals) buy the shares they were made available for purchase by the company.
There are other steps in between but thats basically it.
There is not set amount of profit a company has to make before going public. (Amazon was unprofitable when it went public and remained that way for a few years after going public) The company does need to have a story for why someone would invest in it and that usually means showing how the company would increase revenues and profitsnand therefore its share price.
A company goes public by listing its shares on a public market (say NASDAQ, NYSE) so anyone can buy or sell them.
There are lots of requirements in order to do so, but profit isn’t one of them. A company mainly has to have its financial reporting in order so it can disclose its books to its investors (so, basically everyone) every quarter.
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